To privatise or not to privatise ... that is the question

Ideas

To privatise or not to privatise ... that is the question

When should we consider privatisation? There are some obvious tests.

Mark Barnes

Always a tricky one, but that’s no reason to not re-open the debate. Privatisation is not the panacea for all public sector services or utilities, particularly in a country with the extent of economic inequality we have. When private citizens make their own decisions to invest in alternatives to public services this can better be described as private substitution. Far from solving any problems, inequality becomes even further entrenched. We’ve already seen this in education, healthcare, personal security, post-retirement funding, transport, you name it. The result is dual streams of very different quality which produce very different outcomes. Education and healthcare are perhaps the most obvious.
Privatisation for real is a government led initiative to purposefully move away from total government control towards the partial or full ownership, management and operation of State Owned Enterprises (SOEs) by the private sector. When should we consider it? There are some obvious tests.
If the public service is a natural or regulated monopoly, privatisation introduces the obvious risk of exploitation by investors seeking only to maximise profits. Single supply, increasing demand – economics 101 will predict the rest. There will have to be rules.
Eskom is a classic example of both a natural and regulated monopoly – there is no alternative and I’m not sure it would be allowed, if there was. It’s difficult to imagine a commercially viable replication of the grid. The principle drivers and measures of the success or otherwise of a utility monopoly must therefore be very different to the profit motive in the private sector. Efficient, cost effective and reliable supply at a price which allows industry to be competitive and which private consumers can afford, are the tests. But, in a utility monopoly, the variables to manage (and get right) are neither that many, nor that complex. Optimise the cost of capital and predict demand within tolerable variance and you’ve got it. Pre-fund major capital expenditure in fair present value structured deals with major users and the room for error gets reduced to single digit percentage variances, well within most risk-contingency matrices and manageable boundaries.
Once you step out of the monopoly environment (natural or regulated), things become more complicated.
It is difficult to manage simultaneous social and economic mandates within the same organism, particularly when the measure of success is only economic and the imperative for existence is primarily social. Services deemed essential by the state should be owned and managed by the state, in the best interests of its citizens. Services which have to compete in the private sector have to be released to do so. It really is as simple as that. The alternative is eternal purgatory.
In this context, release doesn’t mean abrogation of duty, nor does it have to introduce an un-managed return environment for astute investors. But it does mean enough space to act on decisions and enough return to attract private sector capital and expertise. Both have a choice and both come at a price, but they are transparent and at fair market value. The rules of play, as much as fair input prices, have to form a level playing field for all participants. You can’t keep putting insight, initiative, innovation, energy and good ideas out to tender.Sustainable outcomes for those SOE’s which have to compete in the private sector will be found not in purely public or private constructs, but in partnerships. The synergies are self-evident. Perhaps the most obvious is the leverage of under-utilised infrastructure at the right private sector economic rent. Infrastructure in this context would include established footprints, buildings, all forms of connectivity (physical and technological), distribution channels, licences, land, all rights of use and any state controlled enablers.
Beyond the harnessing (but not taming) of experts and energy, and the outcome based incentive structures that drive their results, we’ll also require the efficient capital structures that all private sector competitive businesses demand.
Once we get to this level of optimal partnership design, boundaries of control, ante-nuptial contracts, rights of veto (public interest), and return oversight will be required to complete the picture.
As complex and challenging as it may be to achieve this balance, for some of our SOEs it may be the only way forward to prosperity, or even survival. It is not as though we have to start thinking from scratch. There are ample international precedents and now case studies. We can learn from their mistakes, emulate their successes, and adapt their models to our local circumstances.
Mark Barnes is CEO of the Post Office

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